AgChoice Farm Credit, ACA SECOND QUARTER 2018

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1 AgChoice Farm Credit, ACA SECOND QUARTER 2018 TABLE OF CONTENTS Report on Internal Control Over Financial Reporting... 2 Management s Discussion and Analysis of Financial Condition and Results of Operations... 3 Consolidated Financial Statements Consolidated Balance Sheets... 7 Consolidated Statements of Income... 8 Consolidated Statements of Comprehensive Income... 9 Consolidated Statements of Changes in Members Equity Notes to the Consolidated Financial Statements CERTIFICATION The undersigned certify that we have reviewed the June 30, 2018 quarterly report of AgChoice Farm Credit, ACA, that the report has been prepared under the oversight of the Audit Committee of the Board of Directors and in accordance with all applicable statutory or regulatory requirements, and that the information contained herein is true, accurate, and complete to the best of our knowledge and belief. Darrell L. Curtis Chief Executive Officer Terry A. Davis Chief Financial Officer Shawn D. Wolfinger Chairman of the Board August 8, 2018 AgChoice Farm Credit, ACA 1

2 AgChoice Farm Credit, ACA Report on Internal Control Over Financial Reporting The Association s principal executives and principal financial officers, or persons performing similar functions, are responsible for establishing and maintaining adequate internal control over financial reporting for the Association s Consolidated Financial Statements. For purposes of this report, internal control over financial reporting is defined as a process designed by, or under the supervision of the Association s principal executives and principal financial officers, or persons performing similar functions, and effected by its Board of Directors, management and other personnel. This process provides reasonable assurance regarding the reliability of financial reporting information and the preparation of the Consolidated Financial Statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Association s management has completed an assessment of the effectiveness of internal control over financial reporting as of June 30, In making the assessment, management used the framework in Internal Control Integrated Framework (2013), promulgated by the Committee of Sponsoring Organizations of the Treadway Commission, commonly referred to as the COSO criteria. Based on the assessment performed, the Association s management concluded that as of June 30, 2018, the internal control over financial reporting was effective based upon the COSO criteria. Additionally, based on this assessment, the Association s management determined that there were no material weaknesses in the internal control over financial reporting as of June 30, Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Association, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial information in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures are being made only in accordance with authorizations of management and directors of the Association, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Association s assets that could have a material effect on its Consolidated Financial Statements. Darrell L. Curtis Chief Executive Officer Terry A. Davis Chief Financial Officer August 8, 2018 AgChoice Farm Credit, ACA 2

3 AgChoice Farm Credit, ACA Management s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands) The following commentary reviews the financial condition and results of operations of AgChoice Farm Credit ACA, (Association) for the period ended June 30, These comments should be read in conjunction with the accompanying financial statements, notes to the financial statements, and the 2017 Annual Report of the Association. The accompanying consolidated financial statements were prepared under the oversight of the Audit Committee of the Board of Directors. Information in any part of this Quarterly Report may be incorporated by reference in answer or partial answer to any other item of the Quarterly Report. LOAN PORTFOLIO The Association provides funds to farmers, rural homeowners and farm-related businesses for financing of short- and intermediate-term loans and long-term real estate mortgage loans. The Association s loan portfolio is diversified over a range of agricultural commodities, including dairy, livestock, poultry, forest products, and various crops, and also includes part-time farm and rural home loans. Farm size varies, and many of the borrowers in the region have diversified farming operations. This factor, along with the numerous opportunities for non-farm income in the area, impacts the level of dependency on a given commodity. Loans as of June 30, 2018 totaled $1,865,093, an increase of $12,342 as compared to $1,852,751 at December 31, Net loans outstanding at June 30, 2018, were $1,851,601 as compared to $1,839,259 at December 31, Net loans accounted for 97.1 percent of total assets at June 30, 2018, as compared to 96.2 percent of total assets at December 31, The increase in loans was a result of an increase in local service areas loans, an increase in participations purchased and a decrease in participations sold, offset by a decrease in nonaccrual loans. There is an inherent risk in the extension of any type of credit. Portfolio credit quality continues to be maintained at an acceptable level, and credit administration remains satisfactory. Nonaccrual volume decreased from $20,158 at December 31, 2017 to $16,485 at June 30, 2018, mainly due to paydowns offset by a few small transfers to nonaccruing status. The Association continues efforts to work out of nonaccrual accounts or to assist such operations to return to accrual status. Association management maintains an allowance for loan losses in an amount considered sufficient to absorb possible losses in the loan portfolio based on current and expected future conditions. The allowance for loan losses was $13,492 at June 30, 2018 and December 31, As a further means to reduce credit risk, the Association had $598 and $506 in a reserve for unfunded loan commitments at June 30, 2018 and December 31, 2017, respectively, which is classified as a liability on the Consolidated Balance Sheets. These reserves were considered by management to be adequate to cover possible losses. RESULTS OF OPERATIONS For the three months ended June 30, 2018 Net income for the three months ended June 30, 2018, totaled $9,225 an increase of $450 compared to $8,775 for the same period in This increase resulted primarily from higher net interest income and higher noninterest income, offset by higher noninterest expense. Net interest income increased by $826 for the three months ended June 30, 2018 compared to the same period in This increase resulted from an increase of $2,099 in interest income on accruing loans and investment securities and an increase of $446 in interest income on nonaccruing loans, offset by an increase of $1,719 in interest expense. The provision for loan losses was $498 in the second quarter of 2018 as compared to a provision of $336 in the same period for General reserves increased during the second quarter of 2018 compared to the same period in 2017, primarily due to credit quality and the change in PD factors. The increase in general reserves was offset partially by a decrease in specific reserves. Noninterest income for the three months ended June 30, 2018 increased by $111 to $4,035, compared to $3,924 for the same period of This increase resulted primarily from higher loan fees, higher patronage refunds, higher gains on the sale of premises and equipment, offset by losses on other transactions, mainly unfunded commitments. Noninterest expense for the three months ended June 30, 2018, increased $272, compared to the same period of This increase is due to higher personnel costs, offset by lower FCSIC premiums. AgChoice Farm Credit, ACA 3

4 The provision for income taxes was $113 for the second quarter of 2018 compared to $60 for the second quarter of For the six months ended June 30, 2018 Net income for the six months ended June 30, 2018, totaled $20,085, as compared to $17,295 for the same period in Net interest income increased $1,517 for the six months ended June 30, 2018, as compared to the same period one year ago. Interest income on accruing loans and investment securities increased $4,763, interest income on nonaccruing loans increased by $3 and interest expense increased $3,249 as compared to the same period in The increase in interest income on accruing loans and interest expense is primarily related to an increase in loan volume. Increased general reserves due to loan volume growth, offset by decreases in specific reserves during 2018 resulted in a provision for loan losses of $318, compared to a provision for loan losses of $725 in Noninterest income for the six months ended June 30, 2018, totaled $9,189, as compared to $7,734 for the same period of 2017, an increase of $1,455. This increase resulted primarily from the following factors: an insurance premium refund of $1,268, an increase of $63 in general patronage due to loan volume growth, an increase of $170 in Business Management Services revenue and an increase in late fee income of $82 offset by a decrease of $73 in patronage on participations sold due to a decline in volume sold and a decrease of $57 in fee income on participations purchased. Noninterest expense for the six months ended June 30, 2018, increased $514, compared to the same period of This increase was primarily due to higher personnel costs, training, travel, and public and member relations expenses offset by lower purchased services, data processing, FCSIC and other expenses. The provision for income taxes was $153 for the six months ended June 30, 2018 as compared to $78 for the same period last year. FUNDING SOURCES The principal source of funds for the Association is the borrowing relationship established with the Bank through a General Financing Agreement. The General Financing Agreement utilizes the Association s credit and fiscal performance as criteria for establishing a line of credit on which the Association may draw funds. The Bank advances funds to the Association in the form of notes payable. The notes payable are segmented into variable rate and fixed rate sections. The variable rate note is utilized by the Association to fund variable rate loan advances and operating funds requirements. The fixed rate note is used specifically to fund fixed rate loan advances made by the Association. The total notes payable to the Bank at June 30, 2018, was $1,488,545 as compared to $1,487,719 at December 31, This increase resulted from an increase in loan volume, offset by cash generated from Association 2018 earnings and the receipt of the 2017 patronage refunds from other Farm Credit institutions. CAPITAL RESOURCES Total members equity at June 30, 2018 increased by $12,192 to $399,992 from the December 31, 2017 total of $387,800. The increase is primarily attributed to year-to-date 2018 net income. Total capital stock and participation certificates were $8,156 on June 30, 2018, compared to $11,020 on December 31, Farm Credit Administration (FCA) regulations require all Farm Credit institutions to maintain certain minimum regulatory capital ratios. As of June 30, 2018, the Association was well above the minimum regulatory ratios for all capital adequacy ratios: Minimum Requirement Capital Conservation Buffer* Minimum Requirement with Capital Conservation Buffer Capital Ratios as of June 30, 2018 Ratio Risk-adjusted ratios: CET1 Capital 4.5% 0.625% 5.125% 18.42% Tier 1 Capital 6.0% 0.625% 6.625% 18.42% Total Capital 8.0% 0.625% 8.625% 19.10% Permanent Capital Ratio 7.0% 0.0% 7.0% 18.61% Non-risk-adjusted: Tier 1 Leverage Ratio 4.0% 1.0% 5.0% 19.77% UREE Leverage Ratio 1.5% 0.0% 1.5% 19.90% * - The capital conservation buffers have a 3 year phase-in period and will become fully effective January 1, Risk-adjusted ratio minimums will increase 0.625% each year until fully phased in. There is no phase-in period for the tier 1 leverage ratio. If the capital ratios fall below the minimum regulatory requirements, including the buffer amounts, capital distributions (equity redemptions, dividends, and patronage) and discretionary senior executive bonuses are restricted or prohibited without prior FCA approval. AgChoice Farm Credit, ACA 4

5 REGULATORY MATTERS On May 10, 2018, the Farm Credit Administration adopted a final rule that primarily implements the requirements of Section 939A of the Dodd-Frank Act and grants associations greater flexibility regarding the risk management purposes for investments. The regulation also sets forth the types of eligible investments and establishes a portfolio limit on the amount of investments they may hold. Only securities that are issued by, or are unconditionally guaranteed or insured as to the timely payment of principal and interest by, the U.S. government or its agencies are eligible for risk management purposes. An association may purchase and hold investments not to exceed 10 percent of its 90-day average daily balance of outstanding loans on the last business day of the quarter. The final rule will become effective January 1, RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Please refer to Note 1, Organization, Significant Accounting Policies, and Recently Issued Accounting Pronouncements, in the Notes to the Financial Statements, and the 2017 Annual Report to Shareholders for recently issued accounting pronouncements. Additional information is provided in the following table. The following Accounting Standards Updates ASUs were issued by the Financial Accounting Standards Board (FASB) but have not yet been adopted: Summary of Guidance Adoption and Potential Financial Statement Impact ASU Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Replaces multiple existing impairment standards by establishing a single The Association has begun implementation efforts by establishing a crossdiscipline framework for financial assets to reflect management s estimate of current expected credit losses (CECL) over the complete remaining life of the financial assets. Changes the present incurred loss impairment guidance for loans to a CECL governance structure. The Association is currently identifying key interpretive issues, and assessing existing credit loss forecasting models and processes against the new guidance to determine what modifications may be required. model. The Association expects that the new guidance will result in an increase in its The Update also modifies the other-than-temporary impairment model for allowance for credit losses due to several factors, including: debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. Eliminates existing guidance for purchased credit impaired (PCI) loans, and 1. The allowance related to loans and commitments will most likely increase to cover credit losses over the full remaining expected life of the portfolio, and will consider expected future changes in macroeconomic conditions, requires recognition of an allowance for expected credit losses on these financial assets. 2. An allowance will be established for estimated credit losses on debt securities, Requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. 3. The nonaccretable difference on any PCI loans will be recognized as an allowance, offset by an increase in the carrying value of the related loans. Effective for fiscal years beginning after December 15, 2020, and interim The extent of the increase is under evaluation, but will depend upon the nature periods within those fiscal years. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after and characteristics of the Association s portfolio at the adoption date, and the macroeconomic conditions and forecasts at that date. December 15, The Association expects to adopt the guidance in first quarter AgChoice Farm Credit, ACA 5

6 ASU Leases (Topic 842) Requires lessees to recognize leases on the balance sheet with lease liabilities The practical expedients allow entities to largely account for existing leases and corresponding right-of-use assets based on the present value of lease consistent with current guidance, except for the incremental balance sheet payments. recognition for lessees. Lessor accounting activities are largely unchanged from existing lease The Association has started its implementation of the Update which has accounting. included an initial evaluation of leasing contracts and activities. The Update also eliminates leveraged lease accounting but allows existing As a lessee the Association is developing its methodology to estimate the rightof-use assets and lease liabilities, which is based on the present value of lease leveraged leases to continue their current accounting until maturity, termination or modification. payments but does not expect a material change to the timing of expense Also, expands qualitative and quantitative disclosures of leasing recognition. arrangements. Given the limited changes to lessor accounting, the Association does not expect Requires adoption using a modified cumulative effect approach wherein the material changes to recognition or measurement, but it is early in the guidance is applied to all periods presented. implementation process and the impact will continue to be evaluated. Effective for fiscal years beginning after December 15, 2018, including The Association is evaluating existing disclosures and may need to provide interim periods within those fiscal years. Early adoption is permitted. additional information as a result of adopting the Update. The Association expects to adopt the guidance in first quarter 2019 using the modified retrospective method and practical expedients for transition. Note: Shareholder investment in the Association is materially affected by the financial condition and results of operations of AgFirst Farm Credit Bank. Copies of AgFirst s annual and quarterly reports are available upon request free of charge by calling ext. 2764, or writing Matthew Miller, AgFirst Farm Credit Bank, P.O. Box 1499, Columbia, SC Information concerning AgFirst Farm Credit bank can also be obtained at their website, Copies of the Association s annual and quarterly reports are also available upon request free of charge by calling , ext or writing Terry Davis, AgChoice Farm Credit, ACA, 300 Winding Creek Blvd., Mechanicsburg, PA, 17050, or accessing the website The Association prepares a quarterly report within 40 days after the end of each fiscal quarter, except that no report need be prepared for the fiscal quarter that coincides with the end of the fiscal year of the institution. AgChoice Farm Credit, ACA 6

7 AgChoice Farm Credit, ACA Consolidated Balance Sheets June 30, December 31, (dollars in thousands) (unaudited) (audited) Assets Cash $ 32 $ 16 Investments in debt securities: Held to maturity (fair value of $2,237 and $2,371, respectively) 2,166 2,205 Loans 1,865,093 1,852,751 Allowance for loan losses (13,492) (13,492) Net loans 1,851,601 1,839,259 Accrued interest receivable 8,820 7,027 Equity investments in other Farm Credit institutions 23,980 24,009 Premises and equipment, net 12,740 11,299 Other property owned Accounts receivable 6,561 27,171 Other assets 1,504 1,424 Total assets $ 1,907,474 $ 1,912,436 Liabilities Notes payable to AgFirst Farm Credit Bank $ 1,488,545 $ 1,487,719 Accrued interest payable 3,834 3,500 Patronage refunds payable 5,231 21,593 Accounts payable 2,753 5,384 Other liabilities 7,119 6,440 Total liabilities 1,507,482 1,524,636 Commitments and contingencies (Note 8) Members' Equity Capital stock and participation certificates 8,156 11,020 Retained earnings Allocated 161, ,489 Unallocated 230, ,361 Accumulated other comprehensive income (loss) (69) (70) Total members' equity 399, ,800 Total liabilities and members' equity $ 1,907,474 $ 1,912,436 The accompanying notes are an integral part of these consolidated financial statements. Ag Choice Farm Credit, ACA 7

8 AgChoice Farm Credit, ACA Consolidated Statements of Income (unaudited) For the three months For the six months ended June 30, ended June 30, (dollars in thousands) Interest Income Loans $ 24,160 $ 21,614 $ 47,450 $ 42,682 Investments Total interest income 24,194 21,649 47,518 42,752 Interest Expense Notes payable to AgFirst Farm Credit Bank 11,319 9,600 21,898 18,649 Net interest income 12,875 12,049 25,620 24,103 Provision for loan losses Net interest income after provision for loan losses 12,377 11,713 25,302 23,378 Noninterest Income Loan fees Fees for financially related services ,200 1,079 Patronage refunds from other Farm Credit institutions 3,057 3,004 6,129 6,141 Gains (losses) on sales of rural home loans, net Gains (losses) on sales of premises and equipment, net 19 (19) 51 (152) Gains (losses) on other transactions (52) 4 (53) 36 Insurance Fund refund 1,268 Other noninterest income Total noninterest income 4,035 3,924 9,189 7,734 Noninterest Expense Salaries and employee benefits 4,655 4,216 9,609 8,746 Occupancy and equipment Insurance Fund premiums ,061 (Gains) losses on other property owned, net Other operating expenses 1,755 1,684 3,338 3,250 Total noninterest expense 7,074 6,802 14,253 13,739 Income before income taxes 9,338 8,835 20,238 17,373 Provision for income taxes Net income $ 9,225 $ 8,775 $ 20,085 $ 17,295 The accompanying notes are an integral part of these consolidated financial statements. Ag Choice Farm Credit, ACA 8

9 AgChoice Farm Credit, ACA Consolidated Statements of Comprehensive Income (unaudited) For the three months For the six months ended June 30, ended June 30, (dollars in thousands) Net income $ 9,225 $ 8,775 $ 20,085 $ 17,295 Other comprehensive income net of tax Employee benefit plans adjustments Comprehensive income $ 9,226 $ 8,776 $ 20,086 $ 17,296 The accompanying notes are an integral part of these consolidated financial statements. Ag Choice Farm Credit, ACA 9

10 AgChoice Farm Credit, ACA Consolidated Statements of Changes in Members Equity (unaudited) Capital Accumulated Stock and Retained Earnings Other Total Participation Comprehensive Members' (dollars in thousands) Certificates Allocated Unallocated Income (Loss) Equity Balance at December 31, 2016 $ 11,049 $ 161,489 $ 181,537 $ (57) $ 354,018 Comprehensive income 17, ,296 Capital stock/participation certificates issued/(retired), net (89) (89) Dividends declared/paid 13 (13) Patronage distribution adjustment 4 4 Balance at June 30, 2017 $ 10,973 $ 161,489 $ 198,823 $ (56) $ 371,229 Balance at December 31, 2017 $ 11,020 $ 161,489 $ 215,361 $ (70) $ 387,800 Comprehensive income 20, ,086 Capital stock/participation certificates issued/(retired), net (2,873) (2,873) Dividends declared/paid 9 (9) Patronage distribution Cash (5,000) (5,000) Patronage distribution adjustment (21) (21) Balance at June 30, 2018 $ 8,156 $ 161,489 $ 230,416 $ (69) $ 399,992 The accompanying notes are an integral part of these consolidated financial statements. Ag Choice Farm Credit, ACA 10

11 AgChoice Farm Credit, ACA Notes to the Consolidated Financial Statements (dollars in thousands, except as noted) (unaudited) Note 1 Organization, Significant Accounting Policies, and Recently Issued Accounting Pronouncements Organization The accompanying financial statements include the accounts of AgChoice Farm Credit, ACA and its Production Credit Association (PCA) and Federal Land Credit Association (FLCA) subsidiaries (collectively, the Association). A description of the organization and operations, the significant accounting policies followed, and the financial condition and results of operations for the Association as of and for the year ended December 31, 2017, are contained in the 2017 Annual Report to Shareholders. These unaudited interim consolidated financial statements should be read in conjunction with the latest Annual Report to Shareholders. Basis of Presentation In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary for a fair statement of results for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed. Certain amounts in the prior period s consolidated financial statements have been reclassified to conform to the current period presentation. Such reclassifications had no effect on the prior period net income or total capital as previously reported. The results of any interim period are not necessarily indicative of those to be expected for a full year. Significant Accounting Policies The Association s accounting and reporting policies conform with U.S. generally accepted accounting principles (GAAP) and practices in the financial services industry. To prepare the financial statements in conformity with GAAP, management must make estimates based on assumptions about future economic and market conditions (for example, unemployment, market liquidity, real estate prices, etc.) that affect the reported amounts of assets and liabilities at the date of the financial statements, income and expenses during the reporting period, and the related disclosures. Although these estimates contemplate current conditions and expectations of change in the future, it is reasonably possible that actual conditions may be different than anticipated, which could materially affect results of operations and financial condition. Management has made significant estimates in several areas, including loans and allowance for loan losses (Note 2, Loans and Allowance for Loan Losses), investment securities and other-than-temporary impairment (Note 3, Investments), and financial instruments (Note 6, Fair Value Measurement). Actual results could differ from those estimates. For further details of significant accounting policies, see Note 2, Summary of Significant Accounting Policies, from the latest Annual Report. Accounting Standards Updates (ASUs) Issued During the Period The following ASUs were issued by the Financial Accounting Standards Board (FASB) since the most recent year end: In February 2018, the FASB issued ASU Technical Corrections and Improvements to Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update include items brought to the Board s attention by stakeholders. The amendments clarify certain aspects of the guidance issued in Update as described below. The amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update In February 2018, the FASB issued ASU Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and are intended to improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The Update also requires certain disclosures about stranded tax effects. The guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. AgChoice Farm Credit, ACA 11

12 ASUs Pending Effective Date For a detailed description of the ASUs below, see the latest Annual Report. Potential effects of ASUs issued in previous periods: In March 2017, the FASB issued ASU Receivables Nonrefundable Fees and Other Costs (Subtopic ): Premium Amortization on Purchased Callable Debt Securities. The guidance relates to certain callable debt securities and shortens the amortization period for any premium to the earliest call date. The Update will be effective for interim and annual periods beginning after December 15, 2018 for public business entities. Early adoption is permitted. The Association is in the process of evaluating what effects the guidance may have on the statements of financial condition and results of operations. In June 2016, the FASB issued ASU Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on financial instruments. It requires an organization to measure all expected credit losses for financial assets held at the reporting date. Financial institutions and other organizations will use forward-looking information to better estimate their credit losses. Additionally, the ASU amends the accounting for credit losses on available-forsale debt securities and purchased financial assets with credit deterioration. For public companies that are not SEC filers, it will take effect for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, The Association is in the process of evaluating what effects the guidance may have on the statements of financial condition and results of operations. In February 2016, the FASB issued ASU Leases (Topic 842). This Update, and subsequent clarifying guidance issued, requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Leases will be classified as either finance leases or operating leases. This distinction will be relevant for the pattern of expense recognition in the income statement. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Early adoption is permitted. The Association is in the process of evaluating what effects the guidance may have on the statements of financial condition and results of operations. Accounting Standards Effective During the Period There were no changes in the accounting principles applied from the latest Annual Report, other than any discussed below. No recently adopted accounting guidance issued by the FASB had a significant effect on the current period reporting. See the most recent Annual Report for a detailed description of each of the standards below: In March 2017, the FASB issued ASU Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost related to the income statement presentation of the components of net periodic benefit cost for an entity s sponsored defined benefit pension and other postretirement plans. The amendments were effective January 1, 2018 for the Association. Adoption in 2018 did not have a material effect on the Association s financial statements, but did require reclassification of service costs to Other Operating Expenses. In February 2017, the FASB issued ASU Other Income Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic ): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The Update clarifies whether certain transactions are within the scope of the guidance on derecognition and the accounting for partial sales of nonfinancial assets, and defines the term in substance nonfinancial asset. The amendments conform the derecognition guidance on nonfinancial assets with the model for transactions in the new revenue standard. The amendments were effective January 1, 2018 for the Association. Adoption in 2018 had no impact on the statements of financial condition and results of operations of the Association. In January 2017, the FASB issued ASU Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments provide a more robust framework to use in determining when a set of assets and activities is a business. They also support more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The ASU was effective January 1, 2018 for the Association. The amendments were applied prospectively. Adoption of the guidance in 2018 had no impact on the statements of financial condition and results of operations. In January 2016, the FASB issued ASU Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities. The Update was intended to improve the recognition and measurement of financial instruments. The new guidance makes targeted improvements to existing GAAP. AgChoice Farm Credit, ACA 12

13 Transition Information The Association identified investment securities affected by this Update and adopted the guidance on January 1, The amendments related to equity securities without readily determinable fair values were applied prospectively to equity investments that existed as of the date of adoption. Application of the amendments did not require a cumulative effect adjustment. Adoption did not have an impact on the Association's financial condition or results of operations. The new standard did result in changes to certain disclosures. In May 2014, the FASB issued ASU Revenue from Contracts with Customers (Topic 606). This guidance changed the recognition of revenue from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance also included expanded disclosure requirements that result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity s contracts with customers. Based on input received from stakeholders, the FASB issued several additional Updates that generally provided clarifying guidance where there was the potential for diversity in practice, or address the cost and complexity of applying Topic 606. Transition Information The Association identified ancillary revenues affected by this Update and adopted the guidance on January 1, The amendments were applied using the modified retrospective approach. The Association elected to only apply the guidance to contracts that were not completed at the date of initial application. Subtopics on gains and losses from the derecognition of nonfinancial assets, and on other assets and deferred costs-contracts with customers were adopted using the same transition options. Adoption did not have an impact on the Association's financial condition or results of operations. The new standard did result in enhanced disclosures about revenue (see Note 9, Revenue from Contracts with Customers). Note 2 Loans and Allowance for Loan Losses The Association maintains an allowance for loan losses at a level considered adequate by management to provide for probable and estimable losses inherent in the loan portfolio as of the report date. The allowance for loan losses is increased through provisions for loan losses and loan recoveries and is decreased through loan charge-offs and allowance reversals. A review of individual loans in each respective portfolio is performed periodically to determine the appropriateness of risk ratings and to ensure loss exposure to the Association has been identified. See Note 3, Loans and Allowance for Loan Losses, from the latest Annual Report for further discussion. Credit risk arises from the potential inability of an obligor to meet its repayment obligation. The Association manages credit risk associated with lending activities through an assessment of the credit risk profile of an individual obligor. The Association sets its own underwriting standards and lending policies that provide direction to loan officers and are approved by the board of directors. A summary of loans outstanding at period end follows: June 30, 2018 December 31, 2017 Real estate mortgage $ 880,381 $ 869,306 Production and intermediate-term 608, ,351 Loans to cooperatives 55,600 48,678 Processing and marketing 139, ,310 Farm-related business 39,793 38,881 Communication 83,204 78,911 Power and water/waste disposal 19,744 23,257 Rural residential real estate 20,110 19,432 International 13,139 11,964 Lease receivables 5, Total loans $ 1,865,093 $ 1,852,751 A substantial portion of the Association s lending activities is collateralized, and exposure to credit loss associated with lending activities is reduced accordingly. AgChoice Farm Credit, ACA 13

14 The Association may purchase or sell participation interests with other parties in order to diversify risk, manage loan volume, and comply with Farm Credit Administration (FCA) regulations. The following tables present the principal balance of participation loans at periods ended: June 30, 2018 Within AgFirst District Within Farm Credit System Outside Farm Credit System Total Purchased Sold Purchased Sold Purchased Sold Purchased Sold Real estate mortgage $ 6,375 $ 27,395 $ 5,231 $ $ $ $ 11,606 $ 27,395 Production and intermediate-term 36,791 10,153 42,782 9,279 79,573 19,432 Loans to cooperatives ,027 55,659 Processing and marketing 40,310 45,130 85,440 Farm-related business Communication 8,263 75,153 83,416 Power and water/waste disposal 8,436 11,379 19,815 Rural residential real estate International 1,171 12,000 13,171 Lease receivables 5,262 5,262 Total $ 101,978 $ 38,005 $ 251,964 $ 9,279 $ $ $ 353,942 $ 47,284 December 31, 2017 Within AgFirst District Within Farm Credit System Outside Farm Credit System Total Purchased Sold Purchased Sold Purchased Sold Purchased Sold Real estate mortgage $ 6,574 $ 27,578 $ 7,121 $ $ $ $ 13,695 $ 27,578 Production and intermediate-term 45,021 15,453 41,164 7,219 86,185 22,672 Loans to cooperatives 48,725 48,725 Processing and marketing 37,003 47,814 84,817 Farm-related business Communication 10,100 69,037 79,137 Power and water/waste disposal 8,698 14,648 23,346 Rural residential real estate International 12,000 12,000 Lease receivables Total $ 107,396 $ 43,525 $ 241,170 $ 7,219 $ $ $ 348,566 $ 50,744 A significant source of liquidity for the Association is the repayments of loans. The following table presents the contractual maturity distribution of loans by loan type at the latest period end: June 30, 2018 Due less than 1 year Due 1 Through 5 years Due after 5 years Total Real estate mortgage $ 19,500 $ 174,444 $ 686,437 $ 880,381 Production and intermediate-term 94, , , ,054 Loans to cooperatives ,848 10,571 55,600 Processing and marketing 2, ,099 28, ,807 Farm-related business 9,458 21,277 9,058 39,793 Communication 1,205 76,161 5,838 83,204 Power and water/waste disposal 7,656 12,088 19,744 Rural residential real estate 512 2,468 17,130 20,110 International 6,761 6,378 13,139 Lease receivables ,032 5,261 Total loans $ 128,195 $ 790,511 $ 946,387 $ 1,865,093 Percentage 6.87% 42.39% 50.74% % The recorded investment in a receivable is the face amount increased or decreased by applicable accrued interest, unamortized premium, discount, finance charges, or acquisition costs and may also reflect a previous direct write-down of the investment. AgChoice Farm Credit, ACA 14

15 The following table shows the recorded investment of loans, classified under the FCA Uniform Loan Classification System, as a percentage of the recorded investment of total loans by loan type as of: June 30, 2018 December 31, 2017 Real estate mortgage: Acceptable 95.60% 95.37% OAEM Substandard/doubtful/loss % % Production and intermediate-term: Acceptable 95.35% 93.83% OAEM Substandard/doubtful/loss % % Loans to cooperatives: Acceptable % % OAEM Substandard/doubtful/loss % % Processing and marketing: Acceptable % % OAEM Substandard/doubtful/loss % % Farm-related business: Acceptable 97.19% 97.39% OAEM Substandard/doubtful/loss % % June 30, 2018 December 31, 2017 Power and water/waste disposal: Acceptable % 90.44% OAEM Substandard/doubtful/loss % % Rural residential real estate: Acceptable 93.51% 92.75% OAEM Substandard/doubtful/loss % % International: Acceptable % % OAEM Substandard/doubtful/loss % % Lease receivables: Acceptable 98.93% 92.55% OAEM Substandard/doubtful/loss % % Total loans: Acceptable 96.01% 95.49% OAEM Substandard/doubtful/loss % % Communication: Acceptable 94.18% % OAEM 5.82 Substandard/doubtful/loss % % The following tables provide an aging analysis of the recorded investment of past due loans as of: 30 Through 89 Days Past Due June 30, 2018 Not Past Due or Less Than 30 Days Past Due Total Loans and Accrued Interest Recorded Investment 90 Days or More Past Due and Accruing Interest 90 Days or More Past Due Total Past Due Real estate mortgage $ 2,217 $ 373 $ 2,590 $ 882,366 $ 884,956 $ Production and intermediate-term 3,572 1,580 5, , ,075 Loans to cooperatives 55,695 55,695 Processing and marketing 140, ,437 Farm-related business ,981 40,005 Communication 83,314 83,314 Power and water/waste disposal 19,767 19,767 Rural residential real estate ,863 20,193 International 13,180 13,180 Lease receivables ,257 5,280 Total $ 6,002 $ 2,117 $ 8,119 $ 1,865,783 $ 1,873,902 $ 30 Through 89 Days Past Due December 31, 2017 Not Past Due or Less Than 30 Days Past Due Total Loans and Accrued Interest Recorded Investment 90 Days or More Past Due and Accruing Interest 90 Days or More Past Due Total Past Due Real estate mortgage $ 2,398 $ 342 $ 2,740 $ 869,914 $ 872,654 $ Production and intermediate-term 1,406 1,948 3, , ,918 Loans to cooperatives 48,743 48,743 Processing and marketing 137, ,913 Farm-related business ,508 39,037 Communication 79,031 79,031 Power and water/waste disposal 23,310 23,310 Rural residential real estate ,071 19,501 International 11,997 11,997 Lease receivables Total $ 4,529 $ 2,524 $ 7,053 $ 1,852,714 $ 1,859,767 $ AgChoice Farm Credit, ACA 15

16 Nonperforming assets (including related accrued interest as applicable) and related credit quality statistics at period end were as follows: June 30, 2018 December 31, 2017 Nonaccrual loans: Real estate mortgage $ 10,924 $ 11,802 Production and intermediate-term 5,303 8,072 Farm-related business 24 Rural residential real estate Lease receivables Total $ 16,485 $ 20,158 Accruing restructured loans: Real estate mortgage $ 71 $ 324 Production and intermediate-term Total $ 228 $ 468 Accruing loans 90 days or more past due: Total $ $ Total nonperforming loans $ 16,713 $ 20,626 Other property owned Total nonperforming assets $ 16,783 $ 20,652 Nonaccrual loans as a percentage of total loans 0.88% 1.09% Nonperforming assets as a percentage of total loans and other property owned 0.90% 1.11% Nonperforming assets as a percentage of capital 4.14% 5.33% The following table presents information related to the recorded investment of impaired loans at period end. Impaired loans are loans for which it is probable that all principal and interest will not be collected according to the contractual terms of the loan. June 30, 2018 December 31, 2017 Impaired nonaccrual loans: Current as to principal and interest $ 13,937 $ 16,346 Past due 2,548 3,812 Total $ 16,485 $ 20,158 Impaired accrual loans: Restructured $ 228 $ days or more past due Total $ 228 $ 468 Total impaired loans $ 16,713 $ 20,626 Additional commitments to lend $ 403 $ 27 The following tables present additional impaired loan information at period end. Unpaid principal balance represents the contractual principal balance of the loan. Impaired loans: Recorded Investment June 30, 2018 Three Months Ended June 30, 2018 Six Months Ended June 30, 2018 Unpaid Average Interest Income Average Interest Income Principal Related Impaired Recognized on Impaired Recognized on Balance Allowance Loans Impaired Loans Loans Impaired Loans With a related allowance for credit losses: Production and intermediate-term $ 84 $ 148 $ 45 $ 92 $ $ 96 $ Lease receivables Total $ 108 $ 172 $ 61 $ 117 $ $ 123 $ With no related allowance for credit losses: Real estate mortgage $ 10,995 $ 13,109 $ $ 11,954 $ 171 $ 12,581 $ 263 Production and intermediate-term 5,376 7,025 5, , Farm-related business Rural residential real estate Lease receivables Total $ 16,605 $ 20,905 $ $ 18,053 $ 307 $ 19,001 $ 500 Total: Real estate mortgage $ 10,995 $ 13,109 $ $ 11,954 $ 171 $ 12,581 $ 263 Production and intermediate-term 5,460 7, , , Farm-related business Rural residential real estate Lease receivables Total $ 16,713 $ 21,077 $ 61 $ 18,170 $ 307 $ 19,124 $ 500 AgChoice Farm Credit, ACA 16

17 Impaired loans: December 31, 2017 Year Ended December 31, 2017 Unpaid Average Interest Income Recorded Principal Related Impaired Recognized on Investment Balance Allowance Loans Impaired Loans With a related allowance for credit losses: Real estate mortgage $ 1,685 $ 1,869 $ 310 $ 1,833 $ Production and intermediate-term Lease receivables Total $ 2,320 $ 2,603 $ 469 $ 2,524 $ With no related allowance for credit losses: Real estate mortgage $ 10,441 $ 12,063 $ $ 11,358 $ 707 Production and intermediate-term 7,630 9,250 8, Farm-related business Rural residential real estate Total $ 18,306 $ 22,163 $ $ 19,913 $ 1,657 Total: Real estate mortgage $ 12,126 $ 13,932 $ 310 $ 13,191 $ 707 Production and intermediate-term 8,216 9, , Farm-related business Rural residential real estate Lease receivables Total $ 20,626 $ 24,766 $ 469 $ 22,437 $ 1,657 A summary of changes in the allowance for loan losses and recorded investment in loans for each reporting period follows: Real Estate Mortgage Production and Intermediateterm Agribusiness* Communication Power and water/waste disposal Rural Residential Real Estate International Lease Receivables Other (Including Mission Related) Activity related to the allowance for credit losses: Balance at March 31, 2018 $ 3,150 $ 5,782 $ 2,357 $ 863 $ 676 $ 91 $ 18 $ 364 $ $ 13,301 Charge-offs (315) (315) Recoveries 8 8 Provision for loan losses (212) 1,112 (113) (70) (219) (10) Balance at June 30, 2018 $ 2,938 $ 6,902 $ 2,244 $ 793 $ 142 $ 81 $ 20 $ 372 $ $ 13,492 Balance at December 31, 2017 $ 3,298 $ 5,756 $ 1,888 $ 803 $ 1,618 $ 95 $ 27 $ 7 $ $ 13,492 Charge-offs (315) (16) (331) Recoveries Provision for loan losses (361) 1, (10) (1,161) 2 (7) Balance at June 30, 2018 $ 2,938 $ 6,902 $ 2,244 $ 793 $ 142 $ 81 $ 20 $ 372 $ $ 13,492 Balance at March 31, 2017 $ 1,126 $ 6,343 $ 2,098 $ 1,545 $ 977 $ 70 $ 34 $ 11 $ 1 $ 12,205 Charge-offs (11) (11) Recoveries Provision for loan losses 1,500 (1,195) (209) (593) (7) Balance at June 30, 2017 $ 2,626 $ 5,144 $ 1,889 $ 952 $ 1,785 $ 93 $ 27 $ 24 $ 1 $ 12,541 Balance at December 31, 2016 $ 1,184 $ 6,057 $ 1,996 $ 1,496 $ 956 $ 68 $ 34 $ 10 $ 1 $ 11,802 Charge-offs (11) (11) Recoveries Provision for loan losses 1,442 (916) (107) (544) (7) Balance at June 30, 2017 $ 2,626 $ 5,144 $ 1,889 $ 952 $ 1,785 $ 93 $ 27 $ 24 $ 1 $ 12,541 Allowance on loans evaluated for impairment: Individually $ $ 45 $ $ $ $ $ $ 16 $ $ 61 Collectively 2,938 6,857 2, ,431 Balance at June 30, 2018 $ 2,938 $ 6,902 $ 2,244 $ 793 $ 142 $ 81 $ 20 $ 372 $ $ 13,492 Individually $ 310 $ 159 $ $ $ $ $ $ $ $ 469 Collectively 2,988 5,597 1, , ,023 Balance at December 31, 2017 $ 3,298 $ 5,756 $ 1,888 $ 803 $ 1,618 $ 95 $ 27 $ 7 $ $ 13,492 Recorded investment in loans evaluated for impairment: Individually $ 8,455 $ 2,658 $ $ $ $ $ $ 57 $ $ 11,170 Collectively 876, , ,137 83,314 19,767 20,193 13,180 5,223 1,862,732 Balance at June 30, 2018 $ 884,956 $ 611,075 $ 236,137 $ 83,314 $ 19,767 $ 20,193 $ 13,180 $ 5,280 $ $ 1,873,902 Individually $ 9,620 $ 4,796 $ $ $ $ $ $ 50 $ $ 14,466 Collectively 863, , ,693 79,031 23,310 19,501 11, ,845,301 Balance at December 31, 2017 $ 872,654 $ 626,918 $ 225,693 $ 79,031 $ 23,310 $ 19,501 $ 11,997 $ 663 $ $ 1,859,767 Total *Includes the loan types: Loans to cooperatives, Processing and marketing, and Farm-related business. AgChoice Farm Credit, ACA 17